It's always good to see Frédéric Bastiat discussed outside of libertarian circles, because even when his views are misstated, the mere mention of his name might prompt curious readers to check him out for themselves. That can't hurt!
So thank you, Matthew Yglesias, who wrote last week in Slate:
Bastiat's alleged broken windows fallacy involves simply assuming that there's no such thing as genuinely idle resources or an "output gap." In that context, yes, it's a vibrant intuitive depiction of crowding out. But this doesn't counter any Keynesian or monetarist points about the viability of stimulus during a recession induced by nominal shocks, it involves assuming that no such recessions can occur even though they plainly do. In defense of Bastiat, at the time he was writing the modern industrial business cycle was a very new thing and the vast majority of economic ups and downs were caused by things like bad weather which—as you can see in the corn futures market today—is indeed a decisive consideration in an agricultural economy. But that's no excuse for people sitting around in 2012 to be pounding the table with an old book that's non-responsive to modern issues professing to be baffled why people don't find it more persuasive. [Emphasis in original.]
Yglesias asserts that Bastiat merely made certain assumptions about the operation of markets, but Yglesias does not demonstrate that this is the case—and couldn't. Was Bastiat unfamiliar with J. B. Say? Lord Keynes and his fans may think he refuted Say's Law of Markets, but, tellingly, they had to misstate the law first. It's not that "supply creates its own demand," but rather that supply is demand. One produces a good either to consume it oneself or, more commonly, to trade it for another good. Demand and supply are two sides of the same, well, coin—which reminds me to add that Say's Law holds not just in a barter economy but a monetary one also—a freed one, that is, unlike the corporate state we all occupy.
True, someone might sell a good and not spend the money received. But this would lead to idleness only if the economy did not consist in a time structure of production coordinated by interest rates. In other words, money not spent is saved and available for investment (that is, payments for producer goods and labor, which will be spent on consumer goods) at stages remote from the consumer-goods level; that is, long-term investment in production for future consumption. (As Austrian macroeconomist Roger Garrison says, people save for something.)
Given our insatiable demand for goods, in a freed market a general glut couldn't happen; if prices were free to fluctuate in response to changed conditions or entrepreneurial error, the price of goods plentiful relative to demand would fall, while the price of goods deficient relative to demand would rise. Entrepreneurs would then adjust their plans, but since change is the rule, the market would never reach a state of rest. Say's Law is about a (free) process through time, not general equilibrium.
Can Yglesias really be serious when he writes that Bastiat's position "involves assuming that no such recessions can occur even though they plainly do"? It is Yglesias who assumes what must be proved: namely, that the business cycle is a natural feature of the free market, rather than the consequence of government's corporatist meddling with money, banking, and interest rates.
Yglesias furnishes the latest example of "vulgar liberalism," as Kevin Carson calls it. This is the attribution of the evils of corporatism—big-business power, recessions, long-term structural unemployment, exploitation of labor, and more—to its antithesis, the freed market. Keynesians look around, see unemployment and idle resources, and conclude (often encouraged by libertarians) that since the "free market" let this happen and doesn't seem to be doing anything about it, government stimulus is in order.
That's like walking into a movie in the middle, thinking you understand the plot. There are certainly idle labor and idle resources today. But that mere observation says nothing about why they are idle. Ludwig von Mises and F. A. Hayek, bolstered by the anatomists of corporatism, provided an explanation. Critics are welcome to rebut it, but they shouldn't pretend it doesn't exist.
As the Austrian economists explain, central-bank inflationary policies that artificially depress interest rates encourage longer-term production activities that wouldn't have been undertaken otherwise, given the level of real saving. When the boom ends, the malinvestment of labor and resources is revealed. Labor, equipment, and land that had been attracted to production inconsistent with true consumer demand must now be rearranged. The misshapen economy must be permitted to assume a more appropriate shape. But that takes entrepreneurial risk, time, and money (savings). If the correction is to occur quickly and with minimum hardship, the government must get out of the way. In particular, it must not keep interest rates artificially low (discouraging saving) or create uncertainty about the future regulatory and tax regimes. The world is uncertain enough; to the extent government increases uncertainty about regulation and taxation, investors will be encouraged to run in place and not make grand new commitments. This prevents the needed effort to align labor and resources with what consumers want (or will want in the future).
Government spending may stimulate the use idle resources, but that's not good enough. We don't want just any use of recourses—they're scarce, after all. We want uses that consumers would approve of. Politicians, whose decisions face no market test, are clueless in that regard.
So, contra Yglesias, when a fan of Bastiat's sees the broken-window fallacy in government "stimulus" spending, she is on the firmest of ground. Every dime the government spends—whether acquired through taxation or borrowing—is a dime that someone in the private economy won't be spending. If people are not spending already—which is not the case these days—we must look to the earlier government interventions that brought about that condition—and then repeal those anti-market corporatist policies, regulations, and taxes.